The Movement of Funds Through the Economy

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Table of Contents

Introduction
Main body
Conclusion
Reference

Introduction

The savings-surplus sector has excess amounts of money that relic after the disposable income is used. This money can be kept in form of cash in banks or the form of securities. On the other hand, the savings deficit sector does not have savings and even requires additional funds to operate efficiently.

Main body

The savings-surplus sector is primarily made up of households. The inflow of money into the households is usually through wages, profits, rent, and receipt of interest. The outflow of funds is through the payment of taxes and household expenses. The surplus that remains when the inflow of funds is more than the outflow can be invested for a reasonable expected return.

The savings-deficit sector comprises non-financial institutions e.g. retailers, manufacturers, service providers, etc this company receive money from the sale of goods or services to the households. The outflow of the funds is through payments of wages, salaries, taxes, and operational expenses.

The group that makes up the savings deficit sector is characterized by attempts to borrow funds from households. They do this through the issue of shares and bonds. They are therefore borrowers. Savings- surplus sector are lenders because they give the firms money while expecting a return. However, if a company has a lot of retained earnings they can lend others that money and thus cross over to the savings-surplus group.

The financial market provides an avenue by which the funds can be given out or received. It is the surplus i.e. the households which usually constitute the supply in the financial market. It consists of the stock market, bond market, money market, insurance markets, foreign exchange markets, etc without financial markets; the borrowers would have a hard time searching for lenders. A company that is seeking to raise money in the stock market has to sell its shares or bonds to the investors. It is the household that is the main supplies in the financial markets.

Other ways in which the surplus side can lend the ones with deficits is through depositing money in a savings account at a bank, paying the premiums to an insurance firm, purchasing government bonds, and contributing to a retirement fund. Many times these people do not even know that they are lenders.

Conclusion

All of us can’t be on the deficit side. Such a situation would mean that there would be no way of getting funds should the company need them. This is because the circular flow of money in an economy means that there is a constant demand-supply of funds. There will always be lenders and borrowers. (Wikipedia, 2008)

Reference

Wikipedia (2008). The financial Market. Web.

Wikipedia (2008). The circular Flow of Money. Web.

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The Movement of Funds Through the Economy

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